Moore Stephens says shipping must beware exposure to changing risk landscape

The third annual Shipping Risk Survey from international accountant and shipping adviser Moore Stephens confirms that the effective management of risk within the industry has improved slightly over the past 12 months. But shipping still needs to up its game in terms of managing its exposure to risk, which is increasing and changing in nature, not least in terms of the threat posed by cyber security.

Respondents to the survey rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 6.8 out of a possible score of 10.0, compared to 6.6 last time. Charterers returned the highest rating (8.8) in this regard, followed by owners (6.9) and ship managers (6.8). Brokers returned the lowest rating at 6.3. Geographically, Europe (7.0) was ahead of Asia (6.6), but it was the Middle East which returned the highest figure, at 7.8.

Overall, respondents rated the extent to which enterprise and business risk was being managed effectively by their organisations at 7.1 out of 10.0, up from the rating of 7.0 recorded last time and indeed in the inaugural survey in August 2015. Charterers (8.8) expressed the highest level of confidence in this regard, followed by owners (7.3) and managers (6.9). In the previous survey, charterers recorded the lowest rating (6.5) of the main respondent types.

Demand trends were deemed by the greatest number of respondents to pose the highest level of risk, closely followed by competition and the cost and availability of finance. Demand trends were thought to pose the highest level of risk for owners, charterers and brokers, while for managers it was competition that topped the list.

Geographically, demand trends were the number one concern in Europe, Asia and the Middle East, while respondents in Latin America and North America identified competition as posing the highest level of risk.

Respondents to the survey felt that the level of risk posed by most of the factors which impacted their business would remain largely unchanged over the next 12 months, with the exception of ballast water management legislation, cyber security, geopolitics, operating costs and other changes to laws and regulations, which were all perceived to have the potential for increased risk.

Overall, 69% of respondents (unchanged from last time) felt that the senior managers in their organisations had a high degree of involvement in enterprise and business risk management. Meanwhile, 22% (up from 20% previously) said that senior management’s involvement was limited to “periodic interest if risks materialise”, while 7% (down from 10% last time) noted that senior management “acknowledged but had a limited involvement in” enterprise / risk management. Just 2% (marginally up on the 2016 figure) said that senior management had no involvement whatsoever.

Overall, 30% of respondents (compared to 35 % in the previous survey) confirmed that such risk was managed by means of discussion without formal documentation, while 45% noted that risk was documented by the use of spreadsheets or written reports, compared to 41% previously. Internally developed software was employed by 10% of respondents (17% last time) to manage and document risk, while 14% used third-party software, as opposed to just 5% at the time of the previous survey.

On a scale of 1.0 to 10.0, estimates of claims and provisions (up from 4.2 to 4.3) were deemed the factor most likely to result in a material misstatement in companies’ period-end financial statements. Next came impairment involving vessels in use (up from 4.0 to 4.1), changes to legislation (down from 4.2 to 4.1), and reliance on spreadsheets for financial reporting (up from 4.0 to 4.1). Loan covenant non-compliance, meanwhile, was up from 3.8 to 4.0.

A stand-alone survey question addressed only to publicly traded companies revealed that 80% of such organisations had a dedicated audit committee in place. Respondents in two-thirds of those companies, meanwhile, confirmed that their audit committees met on a quarterly basis to discuss risks, while 22% reported that such meetings were held annually.

Michael Simms, Moore Stephens partner, Shipping Industry Group, says: “Embedding proper and effective risk management controls into daily operating procedures is a huge challenge for companies in the shipping sector, where high risk levels are an accepted and fundamental part of the industry. This is particularly the case, as is now, when the industry is ultra-competitive and grappling with an imbalance in tonnage supply and demand, and when wider global economic conditions remain extremely tough.

“In such a scenario, it may be tempting for companies to take their eye off their exposure to risk in pursuit of retaining or securing new business. And although the survey suggests that is not the case, it also reveals that the standard of risk awareness and response capability in many shipping companies is below the required levels.

“The good news is that there is greater acknowledgement that sound enterprise and business risk management is contributing to the success of those shipping organisations which responded to our survey. More companies are now formally documenting the way in which such risk is managed, with a healthy level of involvement by senior management. Moreover, there has been a noticeable increase in the deployment of third-party software to manage exposure to risk.

“But the survey results show that there is still room for improvement. As the level of risk is not only increasing but also changing in nature, there is a need for companies engaged in the shipping industry to up their game in terms of implementing effective corporate governance systems, monitoring procedures and maintaining controls throughout their organisations.

“The factors identified by respondents to the survey as being most likely to result in a material misstatement in their accounts were unsurprising – particularly claims estimates and impairment. The same is true of factors posing an increased level of risk to business over the next 12 months, including operating costs, ballast water management legislation, and cyber security.

“There is nothing new about the challenge posed by operating costs, which are as old as shipping itself. Such costs may have fallen over the past four recorded years, but it is unlikely that this will continue, particularly given the need to meet increasingly onerous legislative and regulatory demands, and continually escalating crew costs. But the need to invest heavily in measures to preserve the environment, and to protect against the threat of cyber-attack, are more recent developments which change the risk landscape for the shipping industry.

“IMO recently approved an extension to the implementation date for the Ballast Water Management Convention, but it is a delay rather than a reprieve for owners and operators. Meeting the cost of compliance over the coming decade represents an enormous challenge.

“The threat to cyber security within the shipping industry, meanwhile, grows apace. Ship operation is becoming an increasingly digitalised business, calling for cyber risk management both on board and ashore. IT systems and onboard operational technology are increasingly being networked and connected to the internet, resulting in a heightened risk of unauthorised access to ships’ systems and networks.

“The effective management of risk is fundamental to both safety and commercial success in the shipping industry. The level of effective management of risk must continue to improve. The challenge for companies operating in the shipping sector is to balance risk awareness and risk management with the pursuit of commercial success in an industry which traditionally rewards success commensurate with the informed and acceptable taking of risk. Those who fail to meet this challenge may pay a heavy price in terms of performance, and even survival.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping, offshore maritime and transport & logistics adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 626 offices of independent member firms in 108 countries, employing 27,997 people and generating revenues in 2016 of $2.7 billion. www.moorestephens.co.uk


For more information:
Michael Simms
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
michael.simms@moorestephens.com

Moore Stephens says 2015 should see return of healthy shipping industry

International accountant and shipping adviser Moore Stephens believes that the shipping industry’s fortunes should be noticeably improved by 2015 if it maintains the recovery which got under way last year. But it warns that the prospects for recovery may still be fragile if the industry fails to meet a number of challenges, including tighter regulation and increased operating costs.

Moore Stephens shipping partner Richard Greiner says, “New Year resolutions are invariably a case of in one year and out the other. Generally speaking, it is wise not to make resolutions which are too ambitious; American troubadour Woody Guthrie had the right idea when he settled for, ‘Wash teeth, if any’. But the shipping industry can afford to be a little more bullish than previously in its aspirations for 2014.

“Shipping is in a different space to that which it occupied a year ago. Confidence rose to a three-year high over the course of 2013. Good things are predicted for freight rates in 2014, more companies are starting to consider new investment, and economic and political issues with the potential to hurt shipping are deemed less severe than twelve months previously.

“Over the next twelve months, we can expect to see more shipping money raised in the public and private equity markets. We may see more non-shipping money invested in shipping than for some time, although not necessarily by dentists. Supply and demand levels should come closer into alignment. Consequently, freight rates are likely to rise and, with them, vessel values. Increased levels of demolition will be required to offset new tonnage. China is already offering subsidies to shipping companies to scrap vessels before their operational expiry date and to replace them with new ships which are eco-friendly and which fly the Chinese flag. So everybody is happy – owners, shipyards, environmentalists (except those worried about the perceived evils of irresponsible recycling) and politicians alike.”

Greiner warns, however, that all the positive indicators remain somewhat fragile. Further,he says, “Operating costs are expected to go up in 2014. Shipping cannot operate without fuel and skilled manpower. Meanwhile, increased regulation of crew welfare, fuel quality and ballast water management are big-ticket items. Environmental regulation is self-perpetuating, witness the news that IMO is to debate plans for shipowners to compile fuel-consumption data to support steps to create carbon dioxide reduction regulations.

“It is to be hoped, however, that the industry can sustain the upturn which began in 2013. If it can, we may see a return to rude health by 2015 although, as John Maynard Keynes warned, ‘The market can stay irrational for longer than you can stay solvent’.”


Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 634 offices of independent member firms in over 100 countries, employing 23,693 people and generating revenues in 2012 of $2.5 billion. www.moorestephens.co.uk


For more information:
Richard Greiner
Moore Stephens
Tel: +44 (0)207 334 9191
richard.greiner@moorestephens.com

Young professionals identify challenges to London’s shipping role

A survey by The Shipping Professional Network in London (SPNL) has confirmed London’s pre-eminent position as a global maritime centre. But almost seventy per cent of the young shipping professionals who responded to the survey warned that London faces the risk of declining influence over the next ten years unless specific measures are put in place to address the key challenges to its future development.

The survey, conducted in co-operation with leading accountant and shipping adviser Moore Stephens, canvassed the opinions of young professionals working primarily in the shipowning, shipbroking and management, chartering, advisory and associated industries.

Respondents were provided with a list of key challenges facing London in its attempts to remain a relevant global maritime centre, and asked to choose the three options which they considered to be most important, in order of priority. ‘Competitiveness’ was the leading choice of respondents, followed by ‘taxation’ and ‘the ability to adapt to a fast-changing environment.’

A number of respondents acknowledged London’s traditional strength in the professional services sector relating to the maritime industries, with one emphasising, “The high-value professional services such as finance, insurance, P&I, law and shipbroking underline the prime importance of having a central London office.” Another said, “As long as IMO, the P&I clubs and NGOs are based in London, it will always be a maritime business hub.” Elsewhere it was noted, “London must concentrate on its strengths in the legal, insurance and financial sectors to raise its shipping profile and attract fresh talent,” and, “London is competitive because a huge proportion of global commodity trade is centred there.”

Others, however, saw threats to these traditional strengths. While acknowledging that, “London is a leading service hub and a one-stop-shop for all ancillary shipping services,” one respondent warned, “Unless it comes up with a way to retain more of the highly educated and trained people coming out of British universities, London’s attractiveness will decline.” Another said, “There is only a shipping industry in London because of the use of English law in contracts. But English law has become very expensive and uncertain. Currently there seems to be nothing better, but this is changing, and the legal and shipping professions are not stepping up to the changing times.”

A number of respondents to the survey identified the prohibitive cost of operating in London. “London is a great city, but too expensive,” said one, “and this, together with high labour costs, makes it uncompetitive.” Another noted, “The cost of operating in London is now outweighing the importance of having a London address. Now it is only foreign shipowners setting up in London, and even the oil majors are moving out.” Elsewhere it was noted, “Unless London faces up to the fact that many other centres are competing on costs, it will see progressive erosion of its premier status.”

Respondents were more or less of one mind in identifying London’s biggest competitor over the next ten years as a centre for maritime business - the Far East and, specifically, Singapore. “London has to remain more attractive than Singapore and Asia for brokerage and shipping industry-related services,” said one. Others, meanwhile, felt that this was unlikely, with one commenting, “It is natural that Singapore and Hong Kong will gradually take over from London.” Others still acknowledged that “places like Singapore and Hong Kong are trying to steal the attention,” and, “The best people now are going to Singapore instead of coming to London.”

One respondent suggested, “Work with Singapore, not against it,” while another said, “Companies should partner with Far East organisations so that, if nothing else, London is their European hub.”

UK taxation was cited by a number of respondents as an implicit threat to London’s reputation as a maritime centre. “The UK needs to come up with a more hospitable environment in terms of taxes and regulations in order to attract more shipping companies,” said one. Others advocated “a beneficial tax regime”, “lower tonnage tax”, “an improvement in the tax regime for foreign professionals who are not dependent on public services”, and “changes to corporate taxation.”

Technology was also perceived by a number of respondents as a competitive threat to London. One noted, “There is a need to understand the potential in new technology and its benefit to global trade. Asia understands this and is open to exploiting technological advantages much more than London, where a conservative approach still dominates.”

SPNL chairman Claudio Chistè says, “The survey is a timely reminder of the challenges which London faces over the next ten years if it is to retain its pre-eminent position as a provider of global maritime services. Our members showed a proper understanding of London’s strengths as a maritime centre, combined with a keen sense of what is happening elsewhere. These are people who are working at the coalface, as it were, who are absorbing new technology and new ideas, and who have the prospect of long careers ahead of them. They want London to succeed.

“The survey also showed that, overall, SPNL members are confident that the markets in which they operate will continue to improve over the coming twelve months, after a very difficult period for the shipping industry.”

Richard Greiner, a shipping partner with Moore Stephens in London, says, “The SPNL survey contained a number of constructive observations. Of course, reducing the cost of operating in London is actually outside the control of the maritime industry, and London is by no means the only city in the world where costs are increasing. But there are things which the shipping industry in London can do, and is already doing. The UK operates a very successful tonnage tax regime, for example, which provides participating companies with a low level of tax on shipping activities, the potential to pay no tax when vessels are sold, and predictability on future tax liabilities. The UK also continues to offer significant tax advantages for individuals resident but not domiciled in the UK.

“London should embrace competition, and use it as a platform to expand and improve. The SPNL survey is a welcome addition to the ongoing debate about London’s role as a global centre for maritime services. Recognising the challenge is the first and most important step towards meeting it.”

Claudio Chistè concludes, “London has shown over centuries that it has the mettle and the determination to compete. The SPNL believes that it will continue to do so, provided it can meet the challenges which have been identified.”

The Shipping Professional Network in London (SPNL) is London's foremost networking forum for young shipping professionals. It enjoys significant broad-based support from over one thousand industry companies and individuals, and has official backing from the UK Chamber of Shipping. SPNL supports tomorrow’s young shipping professionals by way of the recently launched prize for the top ICS London-based student, the SPNL Future London project which is under way, educational port visits, and the support of charities. The SPNL continues to recruit new members from various areas of shipping, including shipowners, service providers, lawyers, brokers, insurers, accounting, class, registry and the offshore sector. www.spnl.co.uk

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 624 offices of independent member firms in over 100 countries, employing 21,224 people and generating revenues in 2012 of $2.3 billion. www.moorestephens.co.uk

Moore Stephens says banks will take a firmer grip on shipping in 2013 while vessel values fall

International accountant and shipping consultant Moore Stephens says the banks will exert more control over the shipping industry in 2013. It also expects vessel values to fall further, and the cost of regulatory compliance to increase.

Moore Stephens partner Julian Wilkinson says, “For shipping in 2012, it was not so much a case of ‘Crisis, What Crisis?’ as ‘Crisis, Which Crisis?’ This year will be equally challenging.  Operating costs are going to go up. Like a commuter facing another increase in rail fares, and no extra money coming in, shipping will most likely have to absorb the costs of more expensive fuel, more costly labour, and dearer raw materials on the back of declining freight income. Even Mr Micawber, the Dickens character who always believed that something would turn up, would have taken one look at the shipping industry’s prospects for 2013 and cried, ‘I’m off!’   

“In 2013, the banks will exert more control over the shipping industry as debt-to-equity ratios deteriorate. Restructuring, deferred payment, impairment and provision have become common coinage in shipping. Openness and the avoidance of unnecessary delay will be key elements to successful financial restructuring. Even if there really are cash-rich banks in China prepared to underwrite shipping deals, nobody is waiting for them to start lending before planning their next move.

“This year will see continued efforts to accelerate scrapping, which is only made more attractive by the approach of expensive classification special survey deadlines. Despite record scrapping levels in the past twelve months, there still exists a considerable gap between the volume of newbuilding deliveries coming onto the market and both the amount of tonnage scrapped and the availability of suitable demolition facilities. Newbuilding deliveries have been running at record levels for three years. One major operator said recently, ‘Global tonnage oversupply is irrelevant.’ It isn’t, but the fact remains that now is a good time to build eco-friendly ships at reasonable prices for which there will be strong demand in the future.

“Expect vessel values to fall further in 2013, last year having closed with a VLCC selling for the lowest price since the mid-90s. The danger is that each successive fall creates a new benchmark. Expect also further increases in the cost of regulatory compliance. That will have to include planning for the BWM convention. Ballast water is not sexy, but it is expensive. Once the percentage of worldwide tonnage is met in the near future, the convention will enter force twelve months thereafter. Owners need to be thinking now about where the money for retrofitting – and it is a lot of money – is coming from.

“Remarkably, the Moore Stephens Shipping Confidence Survey shows that the industry closed 2012 more confident than it ended 2011. Now remains a good time to buy for those with cash and a following wind. New investors, or existing stakeholders embarking on new projects, will be putting money into a leaner and greener industry than the one which was making good money before the economic gloom kicked in.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 636 offices of independent member firms in 100 countries, employing 21,197 people and generating revenues in 2011 of $2.3 billion. www.moorestephens.co.uk

 

For more information:                                                               

Julian Wilkinson                                                                                   

Moore Stephens LLP                                                                

Tel: +44 (0)20 73349191                                                           

julian.wilkinson@moorestephens.com